The potential impact of FIDF debt transfer
The government recently passed an executive decree to shift the full debt obligations of the Financial Institutions Development Fund (FIDF) from the government to the Bank of Thailand (BOT).
The goal is to give the government more room for public spending. Under the decree, the BOT will have three sources of funding for debt repayment: 1) profits from BOT operations, (2) profits generated from reserve management, and (3) annual premiums collected from financial institutions.
We outline some of the challenges that the authorities may face amid this shift in debt burden (interest and repayment of principal) to the BOT. First, the central bank is not a for-profit organisation. Thus, if it is burdened with the objective of generating profits to repay FIDF debt, this could influence its independence and its ability to conduct monetary policy. For example, the BOT’s profit and loss account shows that it has made a loss in six of the past 10 years. This is not surprising, since Asian central banks have generally been buying US dollars (to curb their currencies’ strength so as to help exporters) over the past decade in a bearish dollar environment. The BOT has generally been a net buyer of US dollar-baht from its level of 46.0 in 2011 all the way down to 31.0 currently.
In addition to losses on the FX spot market, there is the consideration of sterilisation costs. Typically, when a central bank buys dollars in the spot market, it is removing dollars from the system and injecting local-currency liquidity – in this case, baht. If this is unsterilised, it leads to an increase in money supply and inflation. Thus, the central bank typically sterilises its intervention via FX swaps or by issuing BOT bonds. Simple mathematics shows that it is paying around 3 per cent interest on the issuance of BOT bonds, while earning just 0.2 per cent on its dollar holdings (typically by parking them in US Treasuries). This negative carry incurred from sterilisation efforts results in losses for the BOT.
The flip side of the argument is that if the BOT were turned into a profit centre with a stated objective of generating profits to repay FIDF debt, it would be incentivised to “not” intervene in the dollar-baht spot market to avoid FX losses and sterilisation costs. Moreover, the rational trade for the central bank, if it just wanted to make money, would be to sell all of its dollar holdings into Asian currencies given the downward trend in the dollar. This would likely achieve the objective of creating profits to repay FIDF debt. However, as a consequence, the baht would likely be very strong versus trading-partner currencies, which would significantly hurt Thailand’s export sector.
Hence, the central bank is likely to face several challenges ahead if it is given the objective of generating profits to repay FIDF debt, facing a conflict of interest between acting in the public interest (for example, to help Thai exporters) and generating profits.
Danny Suwanapruti is senior rates strategist for Standard Chartered Bank.
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